The Federal Reserve caused quite a stir when it released the minutes from its meeting in late April, during which the discussion surrounded the possibility of raising interest rates in June should economic growth continue to move in a positive direction.1 Recent events, however, have led to massive speculation about whether the Fed will put a pause on the rate hike, and if so, for how long.
Last year, the Fed increased interest rates for the first time in almost 10 years. This year, its initial goal was to raise rates four more times. That number has decreased to two more times, and when these hikes will happen remains uncertain.2
"May 2016 was the worst month for job growth in six years."
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The Bureau of Labor Statistics announced that only 38,000 jobs were added to the economy in May, making it the worst month for job growth since 2010. Economists had projected an addition of 155,000 jobs in May, so the announcement came as a bit of a shock. Unemployment rates did fall, from 5 percent to 4.7 percent, but the reason behind the decrease is that fewer people were looking for work.
This revelation is one main driver behind the likelihood that the Fed will choose to leave interest rates alone in June.
According to MarketWatch, David Berson, Nationwide's chief economist, spoke about how he believes that, given the May employment data, the Fed will decide to wait another month to determine whether it will raise interest rates. That way, it can see if May's slow job growth is the start of a trend or just an outlier. If it is indeed an outlier, Berson believes the Fed could choose to raise rates in July. Opinions vary, though.
Brian Bethune, an economics professor at Tufts University, said he believes the Fed won't even think about raising rates again until the fall.3
The Possibility of a British Exit from the European Union is Also Likely to Give the Fed Pause
In addition to the shockingly low job growth in May, the upcoming British vote regarding whether or not to remain part of the European Union is another reason many experts believe the Fed is going to hold off on raising interest rates for now. Britain's potential exit from the EU, or a Brexit as it is being referred to, could have substantial effects on the financial markets. If Britain decides to leave the EU, the dollar is expected to strengthen as credit spreads widen and a rush into safer assets begins.4
The next meeting of the Fed will occur just before the British vote in June, so it is likely that it will wait until its July meeting to determine its next move based on what happens in the EU.
Jon Faust, who once worked for the Fed and now teaches economics at Johns Hopkins University, told Reuters he believes it is a "no-brainer" to wait and see what happens in Britain before making any decisions on interest rates.
"Why move now as opposed to a few weeks from now?" Faust said.
The Upcoming Election is Another Factor Being Discussed
Another point that has been brought up throughout discussions of the potential rate hike is the upcoming presidential election. Following its July meeting, the Fed will not reconvene again until September, which will be during the height of election campaigns. So, if rates are not increased by July, it is possible the Fed will be a hot topic during what is looking to be a rather controversial election.
"Raising interest rates helps curb inflation."
What an Interest Rate Hike Means
When the Fed raises interest rates, it does so in an attempt to keep the economy under control. A rise in interest rates means it is more expensive to borrow money, which can cause a slowdown in economic activity. This slowdown is purposeful and meant to curb inflation.5 Some officials at the Fed believe today's low interest rates are crucial to our healing economy. Others believe it is necessary to raise rates to keep inflation under control.
In some ways, consumers can benefit from an interest rate hike. Higher interest rates might make a loan more expensive, but they could also make loans easier to obtain. After all, lenders will be more open to giving them out since their payback will be higher.
In addition, those who have been tirelessly saving will begin to see higher returns whenever the Fed decides to make its move. This could be especially beneficial for those who are retired and using their savings as their primary mode of financial support.6
Clearly, there is not a lot of certainty regarding what is going to happen with interest rates throughout the rest of 2016. The Wall Street Journal even said the Fed may not end up raising interest rates at all depending on where the economy goes. What consumers should know, however, is that a rate hike is not necessarily something to fear, because there are in fact some good things that could come out of it for them.
It seems America will have to wait until July to find out anything for sure. In the meantime, other economic events can be used as clues, such as what happens in the British vote and whether or not job growth continues to wane or picks back up in June.
1Federal Reserve April Meeting Minutes
2Wall Street Journal